Airline Relative Underperformance Continues

If you've been reading posts from All Star Charts as of late, you've probably noticed a lot of posts about the areas of the market showing relative strength, such as technology and consumer discretionary. However, one industry not getting as much attention is airlines. The reason for that is simple: the Dow Jones Transportation Average ($DJT) is sitting roughly 3% off all-time highs within a strong uptrend, but airlines continue to struggle to gain any altitude, sitting at 52-week lows on an absolute basis and crashing on a relative basis.

The chart below is daily chart of the NYSE Arca Airlines Index ($XAL). For the past 1.5 years, the index has made absolutely no progress, and it continues to chop around between 103 and 124. This chart is one we'd put in the "hot mess" category and steer clear of. While there may be opportunities on an absolute basis in individual stocks or opportunity for range traders in the index, there's often tremendous opportunity cost sitting in markets like this that just aren't trending. (See also: Why Airlines Aren't Profitable.)

With that said, the charts that I think speak volumes about airlines are the ones on a relative basis.

Below is a chart of the Airline Index vs. the Dow Jones Transportation Average showing the massive top this ratio has put in over the past four years. Prices broke decisively below the 2015-2016 lows in April and quickly accelerated to the downside, now approaching nearly four-year lows. While this move may be extended in the short term, this is not a long-term pattern we want to be buying. One technical analysis principle is that there is symmetry in price moves, which would suggest that this is the beginning of a multi-year downtrend, with a price target approximately 32% below the April breakdown level, with several levels of potential support along the way.

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In addition to this, the Airline Index vs. the S&P 500 broke down to 4.5-year lows in May and looks vulnerable to a decline similar in length and magnitude. The measured move of this symmetrical triangle is down near the 2011-2012 lows, representing a nearly 35% decline from the level prices broke below in May. Like the pattern we saw above, this is the beginning of a long-term downtrend that we want no part of on the long side.

The Bottom Line

On an absolute basis, there appears to be very little edge in the Airline Index until this 103 to 124 range resolves itself decisively. While there are several long and short opportunities that look attractive in individual names, it's important to take into account the relative performance of the industry to determine the opportunity cost of putting on a trade.

As of now, the weight of the evidence suggests that this group of stocks is likely to underperform the Dow Jones Transportation Average and the broader market. As a result, we want to continue to focus our efforts on the sectors making new highs to express our bullish thesis in equities. When the weight of evidence changes, we'll gladly change our minds, but for now, it looks like there are better places to be.